Majority Choice of Taxation and Redistribution in a Federation
We provide a model with a federal government and multiple local governments, the former with power to levy an income tax for redistribution, and the latter choosing a local income tax, property tax, lump-sum tax or subsidy, and a local public good. Policy is set by majority choice at each tier of government by households that differ by income and ability to move across communities. We provide sufficient conditions for existence of equilibrium and examine its properties. Central findings are federal income distribution, little local redistribution, and local preference for property taxation over income taxation to fund local public goods.
The authors thank Roland Benabou and Thomas Nechyba for his comments. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.